Question

Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:

a. Received contributions of \(10,000 in exchange for common stock.

b. Purchased equipment for \)5,000 on account

c. Paid \(400 for office supplies.

d. Earned and received \)2,500 cash for service revenue.

e. Paid \(400 for wages to employees.

f. Cash dividends of \)1,000 were paid to stockholders.

g. Earned \(1,000 for services provided. Customer has not yet paid.

h. Paid \)1,000 for rent.

i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

Indicate the effects of the business transactions on the accounting equation for

Elaine’s Inflatables. Transaction (a) is answered as a guide.

a. Increase asset (Cash); Increase equity (Common Stock)

Short answer

(a) Increase asset (Cash); Increase equity (Common Stock)

(b)Increase asset (Equipment); Increase liability (Accounts payable)

(c) Increase asset (Office supplies); Decrease asset (Cash)

(d) Increase asset (Cash); Increase equity (Service Revenue)

(e) Decrease asset (Cash); Decrease equity (Salaries Expense)

(f) Decrease asset (Cash); Decrease equity (Dividends)

(g) Increase asset (Accounts Receivable); Increase equity (Service Revenue)

(h) ) Decrease asset (Cash); Decrease equity (Rent Expense)

(i) Increase liability (Accounts Payable); Decrease equity (Utilities Expense)

Step-by-step solution

Explanation on Accounting Equation

As per the Accounting equation general rule, total assets is equal to the sum of total liabilities and equity.

Explanation on Asset, Liability and Equity

Assets indicates the resources of the business, that it owns and provides economic benefits in future. It includes cash, building, land, accounts receivable, inventories, etc.

Liabilities are the obligations or debts that the business has to repay it to the creditors or lenders. It includes accounts payable, notes payable, interest payable, etc.

Equity indicates the claim of the owners of the entity on the assets of the entity. It includes common stock, revenues, retained earnings, expenses, etc.